BIS Working Papers No 312 China’s high saving rate: myth and reality by Guonan Ma and Wang Yi Monetary and Economic Department June 2010 JEL classification: E20; E21; O11; O16; O53 Keywords: Saving; corporate, household and government saving; Chinese economy BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. Copies of publications are available from: Bank for International Settlements Communications CH-4002 Basel, Switzerland E-mail: publications@bis.org Fax: +41 61 280 9100 and +41 61 280 8100 This publication is available on the BIS website ( www.bis.org ). © Bank for International Settlements 2010. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISBN 1682-7678 (online) China’s high saving rate: myth and reality Guonan Ma and Wang Yi 1 Abstract The saving rate of China is high from many perspectives – historical experience, international standards and the predictions of economic models. Furthermore, the average saving rate has been rising over time, with much of the increase taking place in the 2000s, so that the aggregate marginal propensity to save exceeds 50%. What really sets China apart from the rest of the world is that the rising aggregate saving has reflected high savings rates in all three sectors – corporate, household and government. Moreover, adjusting for inflation alters interpretations of the time path of the propensity to save in the three sectors. Our evidence casts doubt on the proposition that distortions and subsidies account for China’s rising corporate profits and high saving rate. Instead, we argue that tough corporate restructuring (including pension and home ownership reforms), a marked Lewis-model transformation process (where the average wage exceeds the marginal product of labour in the subsistence sector) and rapid ageing process have all played more important roles. While such structural factors suggest that the Chinese saving rate will peak in the medium term, policies for job creation and a stronger social safety net would assist the transition to more balanced domestic demand. JEL classificati: E20; E21; O11; O16; O53 Keywords: Saving; corporate, household and government saving; Chinese economy 1 Guonan Ma is from the Bank for International Settlements (BIS) and Wang Yi from the People’s Bank of China (PBC). The views expressed here are those of the authors only and do not necessarily reflect those of the BIS or the PBC. The paper has benefited from comments by participants at the BIS seminar in February 2010 and the Hong Kong Institute of Monetary Research seminar in May 2010, especially those by Claudio Borio, Vincent Chan, Ben Cohen, Andrew Filardo, Robert McCauley, Madhusudan Mohanty, Ramon Moreno, Thomas Rawski, Philip Turner and Zhang Ming. We also wish to thank Nathalie Carcenac, Jimmy Shek and Shi Chunhua for their able assistance. Errors are ours. 1 1. Introduction The high saving rate of China has attracted much attention. The nation saves half of its GDP and its marginal propensity to save (MPS) approached 60% during the 2000s (Zhou, 2009; ADB, 2009; IMF, 2009). Such a saving rate has important implications both for China’s own internal balance and for the external balance. Saving is fundamentally the outcome of intertemporal optimisation. Yet there are many different schools of thought about the role of saving in economics. Some stress saving as a core driver of economic development (Lewis, 1954). Others focus on links with cycles of aggregate demand. Others see excess saving as a key source of global imbalances and even a major cause for the international financial crisis (Bernanke, 2005 and Wolf, 2008). Nor is the statistical measurement of saving very precise. Saving is a residual concept defined as the difference between income and consumption. Small errors in the measurement of either large aggregate can lead to significant mismeasurement of savings. The causality between saving and other economic variables can run in both directions. And possible determinants of saving can be cyclical or secular. This paper has three aims: to highlight the stylised facts of Chinese saving; to review the debate over factors shaping the saving dynamics; and to explore its medium-term outlook and policy implications. Our review combines an international comparison of gross national saving and a breakdown of this aggregate by the components of household, corporate and government saving. Building on a growing body of work on this subject, we hope to take stock of the progress in understanding Chinese saving behaviour, put the debate in perspective and shed new light on the trends in, and forces behind, high Chinese saving. The main findings of the paper are as follows: – First, China’s saving rate is high by historical experience, international standards and model predictions and also has been rising (especially in the 2000s). – Second, saving by each of the three sectors is also high but not exceptional. What really sets China apart from the rest of the world is that it ranks near the top globally across all three components. – Third, adjusting for the effect of inflation alters the time path sectoral saving rates. Our inflation-adjusted numbers suggest that most of the smaller increase in corporate saving took place in the 2000s – and not in the 1990s as appears from the raw data. – Fourth, we question some of the more recent wisdom about the principal drivers of high Chinese saving. In particular, the evidence does not support the proposition that distortions and subsidies have been the principal causes of China’s rising corporate profits or high saving rate. – Fifth, we argue that three major microeconomic factors have been key: (a) major institutional reforms including very tough corporate restructuring, pension reform and the spread of private home ownership; (b) a marked Lewis-model transformation process as labour left the subsistence sector where its marginal product was less than its average wage; and (c) a rapid ageing process. While structural factors point to a peaking in the Chinese saving rate in the medium term, policy measures promoting job creation and a stronger social safety net would contribute to the transition to more balanced domestic demand. The paper is organised as follows. The next section discusses the data issues and highlights China’s gross national saving in an international perspective. Section 3 provides a broader backdrop to the Chinese saving trend. Section 4 examines saving of the corporate, household and government sectors and reviews some of the explanations advanced in the literature. Section 5 briefly outlines some of the structural factors shaping the medium-term outlook for the Chinese saving rate and explores two policy initiatives, before Section 6 concludes. 2. Measurements and stylised facts of Chinese saving This section summarises the main data issues in measuring the Chinese saving rate and highlights some of its most salient stylised facts. 2.1 Data and measurement issues To lay a sound basis for discussion, we first clarify some of the confusions associated with the measurements of the Chinese saving rate. There are two principal approaches to measuring China’s gross national saving (GNS), both following the SNA93 definition of GNS as gross national disposable income (GNDI) less final consumption expenditure. The first approach uses expenditure-based GDP in estimating GNDI and produces an estimated GNS series that is equivalent to the sum of gross capital formation and current account balance. The second takes production-based GDP and yields a GNS series consistent with the measure based on the flow-of-fund statistics, which allows for breakdowns of both disposable income and saving by sector. 2 Graph 1 China’s gross national saving As a percentage of GDP Gross national saving Saving-investment balance and current account 30 35 40 45 50 55 84 86 88 90 92 94 96 98 00 02 04 06 08 Expenditure-based Production-based –10 –5 0 5 10 15 83 85 87 89 91 93 95 97 99 01 03 05 07 Saving less investment 1 Current account balance 1 Production-based. Sources: NBS; and authors’ own estimates. 2 The Chinese time series on gross national saving at the aggregate level starts with 1982, but the official flow of fund statistics begins from 1992. 3 The accuracy of both of these estimates could also be complicated by three measurement and data issues, which all point to possible upward biases of China’s gross national saving rate. First, Heston and Sicular (2008) observe a pattern of positive inventory accumulation of at least 1–2% of GDP every year. This may suggest possible overestimation of the Chinese saving rate, as in a mature economy, restocking and destocking would rotate over the business cycles. Yet as discussed below, China’s industrial sales expanded much faster than GDP over time, thus justifying persistently positive inventory changes. The second upward bias of the Chinese saving rate is a potential understatement of imputed housing rent. The Chinese rural household surveys suggest that imputed rent is implausibly low, at merely five US dollars a person per annum. 3 Since the imputed rent is both income and consumption for households, it does not affect the amount of their saving but the proportion they save from their income. As a result, China’s gross national saving could be overstated, but probably by no more than 1%–2% of GDP. The third potential bias is the understatement of retained earnings at foreign firms operating in China, which may lead foreign saving to be reported as part of gross saving, thus overstating both the current account surplus and national saving. According to Zhang (2009), the under-recorded profits at foreign firms in China may be as large as 2% of GDP. In sum, China’s gross national saving rate could be overstated by a likely range of 2%–4% of GDP. 2.2 Stylised facts Notwithstanding the above data issues and measurement complications, there is little doubt that the Chinese national saving rate is high by international standards. It exceeded 53% of GDP in 2008, far above all the OECD economies and overtaking Singapore which has traditionally been among the highest savers globally (Table 1). Moreover, the reported Chinese saving rate is high relative to predictions by structural models based on macroeconomic fundamentals such as income level and growth, demographics, fiscal policy, terms of trade, financial development, and uncertainties. Cross- country empirical panel regression studies have often identified China as a clear outlier with a saving rate one quarter higher than what might have been predicted (Kuijs, 2006; Ferrucci, 2007; and Park and Shin, 2009). In other words, China’s saving/GDP ratio of 53% in 2008 could be 10–13 percentage points above what might be inferred from the empirical studies. The Chinese saving has been rising. Starting from an already high level of more than 30% of GDP in the early 1980s, China’s national saving rate rose to above 50% lately (Graph 1). Therefore, the marginal propensity to save reached 54% over the period of 1982–2008. China has seen three distinct phases in its saving rate – a steady increase from 30%–35% of GDP to 40%–45% between 1982 and 1994 followed by a decline to around 37% by 2000 and a resurgence thereafter to reach over 50%. During this last phase, China’s saving rate on average went up two percentage points of GDP per year, implying a marginal propensity to save of 60%. 3 By definition, imputed rent is non-cash consumption expenditure. The Chinese rural household surveys report both total and cash housing expenditure, which include rent, gas and electricity. The difference between the two is a reasonable proxy of imputed rental, amounting to RMB34 per capita in 2007 or less than five US dollars. This appears low, given that China’s rural home ownership averages something like 90%. Table 1 Gross national saving: an international perspective As a percentage of GDP 1990 1992 1995 2000 2005 2006 2007 2008 China 1 39.2 38.8 42.1 36.8 51.2 54.1 54.1 54.3 China 2 35.6 36.4 38.1 37.3 48.2 49.5 51.8 53.2 India 23.0 21.4 24.5 23.8 34.3 35.8 37.6 33.6 Japan 33.2 33.2 29.3 27.5 26.8 26.9 27.0 Korea 37.7 36.9 36.2 33.6 32.7 31.2 30.6 31.9 Mexico 23.6 18.6 21.1 23.8 23.3 25.5 Singapore 43.6 45.8 49.3 46.9 48.7 49.9 51.7 48.3 Australia 18.6 18.0 18.7 19.7 21.6 21.8 22.5 Canada 17.3 13.4 18.3 23.6 23.8 24.4 23.7 France 20.8 19.6 19.1 21.6 18.5 19.3 19.9 18.9 Germany 25.3 22.3 21.0 20.2 22.2 23.9 25.9 26.0 Italy 20.8 19.1 22.0 20.6 19.5 19.6 20.0 18.2 Switzerland 33.1 28.6 29.6 34.7 36.9 35.5 31.2 United Kingdom 16.4 14.3 15.9 15.0 14.6 14.2 15.6 United States 15.3 14.2 15.5 17.7 14.6 15.8 14.0 12.1 Note: 1 expenditure-based estimate of GNS. 2 production-based estimate of GNS. Sources: National accounts of OECD countries database; ADB; NSB; authors’ own estimates. Such a rapid rise in the national saving rate is rare but by no means unique to China. Fast- growing Asian economies in their transition phases also experienced large and sustained rises in their saving rates (Graph 2). Japan’s aggregate saving/GDP ratio rose by 15 percentage points during 1955–70, and Korea’s saving rate increased from 16% to 40% between 1983 and 2000. Over the past decade, India’s saving rate registered a rise of 10 percentage points of GDP, reaching 38% in 2008. A rising saving rate may also have interacted with a high investment rate. During 1998–2008, China’s investment surged from 37% of GDP to 45%, while that of India went up from 24% to 40%. What sets China apart from the experiences of Japan, Korea and India, though, is its large current account surplus during this transition, as the Chinese saving far outpaced its already high investment. This has been a principal factor behind China’s swing from a net debtor position of 10% of GDP to a net creditor position of 37% within one decade (Ma and Zhou, 2009). A key feature of the Chinese saving rate is that the household, corporate and government sectors each have contributed to the rise in gross national saving. In terms of each component, China’s saving is high but not exceptional. As a share of GDP, China’s corporate saving at best rivals Japan’s, its household saving is below India’s, and its government 5 Graph 2 Saving and investment – international comparison As a percentage of GDP Gross national saving Final consumption expenditure 1 15 25 35 45 55 1982 1987 1992 1997 2002 2007 Japan (1955–81) Korea (1970–96) China India 50 60 70 80 90 1982 1987 1992 1997 2002 2007 Gross capital formation Saving less gross capital formation 15 25 35 45 55 1982 1987 1992 1997 2002 2007 –10 –5 0 5 10 1982 1987 1992 1997 2002 2007 1 Including both private and government final consumption expenditure. Sources: National data; authors’ own estimates. saving is less than Korea’s (Graph 3). However, what really distinguishes China from other countries is that its three saving components have all ranked near their global tops. This, in turn, suggests the need to better understand each sector’s saving dynamics and their interactions; attempts to identify any one single explanation for China’s exceptionally high aggregate saving rate will almost surely be less than convincing. Such a high and rising saving rate will inevitably have implications for China’s growth model and its profile of internal and external balances. First, a high saving has financed strong economic growth, with low inflation and manageable exposures to adverse external shocks. Over the past decade, China’s GDP growth registered 10% plus per annum, while its CPI inflation averaged less than 2%. Second, it helped shape China’s internal and external balances to an important extent. In particular, a rising saving rate implies a falling consumption share in GDP and hence a highly investment-intensive internal demand structure. Over the past 10 years, China’s private consumption declined from 47% of GDP to 36%, the lowest among the world’s major economies. 4 4 As a comparison, India’s consumption share fell from 64% to 55% in the same period. But a falling consumption share should not be confused with anaemic consumer demand growth – China’s private consumption has been growing at near double-digit paces in recent years. Graph 3 Gross national saving, by institutional sector As a percentage of GDP China’s gross national saving 2005–07 average, by market 0 10 20 30 40 50 60 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Household Corporate Government 0 1 0 2 0 3 0 4 0 5 0 60 US TW PH FR DE JP KR IN CN Household Corporate Government CN = China; DE = Germany; FR = France; IN = India, JP = Japan; KR = Korea; PH = Philippines; TW = Chinese Taipei; US = United States. Sources: ADB; OECD; national data; authors’ own estimates. 3. A backdrop to the Chinese saving behaviour Before we get into the detailed breakdowns of gross national saving, it is useful to first sketch some of the bigger forces influencing the whole Chinese economy. These forces may have been an important but often neglected part of the explanation for the high Chinese saving rate and fall into two broad categories: (1) major secular economic and demographic trends; and (2) key institutional changes. 3.1 Secular forces At least three secular forces could have important bearing on China’s high saving rate. First, China has experienced rapid structural changes, as its agriculture share in GDP fell from 30% to 10% during 1980–2008 (Table 2). Second, underpinning this transformation has been the large-scale rural-urban labour migration and urbanisation – the agriculture share of the total employment shrank from 70% to 40% (to 25%, according to Brandt et al (2008)), while the urban population share rose from 20% to 45%. Third, China’s demographic transition has been very compressed, in part owing to the one-child policy. China’s dependence dropped from 68% to 38% within a generation, resulting in a surge of the working-age share of the population from 60% to 74%. As a consequence, China’s labour supply growth has been strong but is expected to slow sharply in 10 years from now. These three secular forces interacted to generate a sustained and large-scale labour migration from farms to factories. This dynamics can be best summarised as a dualism transformation process described by the Lewis model (Lewis, 1954). In this model, the modern sector with rising productivity draws surplus labour from the traditional sector at a 7 Table 2 A backdrop: changes in the Chinese economies As a percentage of GDP Total population = 100 Primary sector Manu- facturing Construc- tion Services Agri- cultural share in employ- ment Urban share in population Working-age share in population 1980 30.2 43.9 4.3 21.6 68.7 19.4 59.7 1990 27.1 36.7 4.6 31.5 60.1 26.4 66.7 2000 15.1 40.4 5.6 39.0 50.0 36.2 68.4 2008 10.7 41.1 5.4 41.8 39.6 45.7 74.3 Sources: NSB and authors’ own estimates. relatively low wage rate. The Lewis model predicts a rising profit share in income, accelerated capital accumulation and faster economic growth during the transformation process, therefore a higher saving rate. This process, while not unique, could have been more accentuated in China’s case because of its compressed demographic transition and thus may help explain its recent high saving and investment rates. 3.2 Institutional factors A number of major institutional reforms since the 1990s could also have significantly influenced the Chinese saving trends. First, between 1995 and 2005, China went through its toughest corporate restructuring, leading to large-scale labour retrenchment. The employment at state companies was halved (Graph 4). Downsized employees received modest social welfare benefits, while many smaller money-losing state companies were shut down altogether. As a result, the enterprise-based cradle-to-grave social safety net shrank rapidly (Cai et al, 2008). Such corporate restructuring tends to directly boost corporate efficiency and reduce job security, lifting both corporate and household saving. Second, the 1997 pension reform transformed the previous pay-as-you-go system to a partially funded three-pillar scheme. The new scheme reduced pension benefits, increased contributions and introduced pre-funded individual pension accounts and has expanded to cover more firms over time. 5 This institutional change has interacted with the diminished role for family and increased concerns over rising pressure on public retirement schemes in anticipation of rapid population ageing and thus may have induced additional accumulation of capital through increased saving and investment, the so-called “second demographic dividend” (Wang and Mason, 2008). Therefore, reduced pension wealth and anticipated acceleration of population ageing could both help lift the current saving rate in China. 5 For more details of China’s pension system, see Feldstein, 1998; Salditt, et al, 2007; Song and Yang, 2010; Herd et al, 2010; and Li and Wu, 2010. Also see Moreno and Santos (2008) for a review of international evidence of the possible effects of pension regimes on saving and the current account balance. 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BIS Working Papers No 312 China’s high saving rate: myth and reality by Guonan Ma and Wang Yi Monetary and Economic Department. 1682-7678 (online) China’s high saving rate: myth and reality Guonan Ma and Wang Yi 1 Abstract The saving rate of China is high from many perspectives